CA Final · Advanced Financial Management · International Financial Management
Spot INR/USD is ₹80.00. Expected annual inflation is 6% in India and 2% in the US. Under relative purchasing power parity, the expected spot rate after one year is closest to:
Under relative purchasing power parity, the expected spot rate equals current spot multiplied by the ratio of domestic to foreign inflation factors. Here 80 × 1.06/1.02 gives about ₹83.14, showing the rupee depreciates because Indian inflation exceeds US inflation.
- A₹83.14Correct
- B₹84.80
- C₹76.98
- D₹80.00
Explanation
Expected spot = 80 × (1.06/1.02) = 80 × 1.039216 = ₹83.14. The option ₹84.80 results from simply adding the 4% differential (80 × 1.06), which uses the wrong base and ignores the US inflation divisor. ₹76.98 inverts the ratio.
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